Succession Planning: And the Next CEO is...

The average tenure of a CEO is now less than five years. Given the potential volatility created by a sudden or ill-conceived change at the top, board members consistently rate succession planning as one of their most important responsibilities.

Yet directors typically give their own boards low marks when it comes to planning for CEO turnover. “The whole business of succession planning is the most important priority any board has,” said William Zollars, chairman and CEO of YRC Wordwide, who along with Theodore L. Dysart of Heidrick & Struggles led a recent discussion on the topic at a Directorship Boardroom Council Roundtable.

What they found is that some companies have refined succession planning more than others. For example, Samuel Armacost, lead director of Chevron, said succession planning at the oil and gas giant is a sophisticated, rigorous process that involves board members who have been CEOs and others experienced in corporate governance, and goes fairly deep into the employee pyramid. The result? “We’ve had almost seamless transitions at the CEO level for as long as I’ve been there, which is 25 years,” he said. Armacost added that while the company has developed a sound process, it still doesn’t go it alone. “We have used outside resources to help us fulfill the process, assess the talent base, and develop criteria by which we’re going to judge candidates. I think that’s critical,” he said.

Another company that has done well in the area is General Electric. Gary Wendt, who served on the board of GE when Jeffrey Immelt succeeded CEO Jack Welch, recounted that GE’s process was “simple but intense” and involved “pruning and testing.” Having also served on other boards, Wendt said it’s important for a director to “demand that the CEO have a process and that he continue to tell the board about it…I think succession planning is fairly easy if you have a process in place.”

Zollars added, however, that boards need to have a sixth sense about what the future will demand. “They need to understand the company—where it is and where it’s going—and, hopefully, see around the corner and decide what skills the next CEO should have.”

Candor on the part of the sitting CEO is critical to successful succession. “Nothing can screw up a succession plan more than having a CEO who’s not really being upfront about what he or she wants to do,” said Zollars.

Transaction Transitions

Succession plans are given particularly intense focus at deal-minded companies or those owned by private-equity firms. Lowell Robinson, chief financial and administrative officer for MIVA and former CFO of Advo and HotJobs, has served on boards of public and private companies. He said private-equity CEOs tend to be more responsive to what the board wants for a couple of reasons: typically, there are fewer shareholders and there is usually an exit strategy. Private-equity investors tend to be more involved in the day-to-day, added Lawrence Ruisi, a director at Hughes Communications. In those instances, he said, oftentimes the CEO is implementing “somebody else’s game plan. He’s running the strategy and ideas that might be set by others. And if the CEO wants to stay and be part of it, that’s great, and if he doesn’t, they’ll go find somebody else who does.”

In some cases, private-equity ownership can serve as a wake-up call for CEOs. Armacost recalled a “forced white-knight transaction” where a CEO proved to be more effective once private-equity shareholders became a factor. “The majority shareholder sat at the table, and [the CEO] had to get things done that, in the past, he would have found easy to ignore or put off in a more diverse-shareholder, public-company environment.”

In some cases, a good succession plan can help things from getting contentious among those vying for the top spot. Former Congresswoman Beverly Byron, who has served on numerous boards, witnessed a duel between two vice presidents who fought to become CEO. “They battled each other for two years and then, all of a sudden, one of the board directors became CEO. The company is extremely successful today, but that process of having two people going head to head did not work at all,” she said.

Setting up a Battle

Margaret “Peggy” Foran, senior vice president of corporate governance at Pfizer, explained how the pharmaceutical company orchestrated its recent CEO transition. Jeffrey Kindler was named to head the company after a battle with two other candidates. Foran noted that during a transition period, CEOs and other executives need to watch every word. “There were three individuals who had been identified as potential candidates, when outgoing CEO Henry McKinnell said, during a Morgan Stanley drug makers conference, that there were ‘three or four candidates.’ I told the board, ‘You know, it’s interesting: you make three front-runners miserable and about 25 other people very happy because they think they’re number four.”